FinTech: a global review of current issues

June 2017 | EXPERT BRIEFING | SECTOR ANALYSIS

financierworldwide.com

Financial technology (FinTech) is changing how money changes hands, and FinTech is evolving faster than the law. The rapid and recent advent of FinTech has left regulators around the world playing catch up, with the current rules being ineffectively imported from regulatory models fit for traditional banking and financial services.

The Canadian regulatory landscape

In October of last year, the Ontario Securities Commission launched a hub called LaunchPad, to assist FinTech companies with navigating and tailoring the regulatory framework to the needs of the individual business. This hub has been created with the recognition that some existing regulatory requirements do not make sense for this new business model.

The British Columbia Securities Commission (BCSC) is now working to create its own framework, in response to the innovation and adoption of new technologies in the financial services sector. Recently, the BCSC released an online survey, published a new tech industry webpage, and announced a dedicated tech team as part of its ongoing effort to assist the British Columbia FinTech industry.

Brenda Leong, BCSC Chair and CEO, commented: “We understand that early-stage companies need access to capital and a clear regulatory framework to operate in.” The BCSC’s aim is to work with industry insiders to create a flexible and balanced regulation that allows for innovative business models. The BCSC also works with other Canadian securities regulators to support FinTech industry growth by facilitating timely and harmonised reviews of registration and exemptive relief applications.

Clearly, FinTech is gaining momentum in British Columbia, with close to 100 companies in the province, nearly a third of which are less than five years old. The BCSC is taking note; currently there are 10 robo-advisory firms registered with the BCSC, seven firms exempt from registration as crowdfunding portals and nine portals that are exempt market dealers.

Trump’s travel ban and FinTech

President Trump’s 27 January executive order – Protecting the Nation from Foreign Terrorist Entry into the United States – has created waves in the tech world. Canadian technology firms are viewing this as an opportunity to lure top tech talent as affected individuals struggle with the impact of the travel ban on their business and mobility.

The global tech industry has been significantly impacted by the US travel policy and on the heels of the executive order, the US tech industry has reacted strongly. A group of 97 American tech firms have filed legal documents claiming that the immigration ban affects their operations and “inflicts significant harm” on their respective business. The amicus brief, which includes tech giants such as Apple, Facebook and Microsoft, states that the travel ban is making it increasingly difficult for US companies to recruit, hire and retain some of the world’s best employees in the tech field. The brief further argues that president Trump’s ban has threatened the companies’ ability to attract talent, business and investment to the US.

On 28 January 2017, Apple CEO Tim Cook sent an email to his staff, explaining Apple’s position on the travel policy. Cook stated: “Apple believes deeply in the importance of immigration – both to our company and to our nation’s future. Apple would not exist without immigration, let alone thrive and innovate the way we do.” The letter went on to say that Apple does not support the ban.

Apple was not the only giant to react, however. Google recalled around 100 of its affected staff from overseas, and Microsoft warned its shareholders that curbs on immigration could have a material impact on its business.

In the wake of the travel ban, Canadian tech firms have opened their arms to those affected. On 29 January 2017, over 150 executives signed an open letter emphasising their support for diversity in the workforce. The letter also implored the Canadian government to institute a visa specifically providing for tech workers displaced by the executive order, which would allow these individuals to work and live in Canada.

The Canadian tech industry has also seen an increase in interest from skilled tech workers after the US recently suspended its processing of H-1B visas. H-1B visas allow workers, such as programmers, engineers and scientists with highly specialised knowledge, to enter the US for three years. In March, US Citizenship and Immigration Services announced it would be suspending processing H-1B visa applications for up to six months starting on 3 April to deal with high-volume backlog. This suspension is another step in a series of moves that restrict mobility for non-US citizens to work in the country, especially those in the FinTech sphere.

Conversely, Canadian companies are trying to expedite visa applications in order to efficiently import talent to tech hubs like Toronto, Vancouver and Montreal. Historically, Canada has struggled to compete with American tech hubs like Silicon Valley for the market’s leading minds but the Canadian industry is hopeful that the shift in US politics might catalyse talent to look north.

Rapid growth in China

China’s FinTech sector is booming, in contrast to the overall global trend of declining investment in non-traditional banking channels.

Venture capital investment in Chinese FinTech companies was in excess of $6.7bn in 2016. This is attributed to the country’s consumer market, with 40 percent of consumers embracing FinTech as an alternative payment method. As a result, China boasts the world’s four largest FinTech firms –all valued over $1b – Ant Financial, Lufax, JD Finance and Qufenqi.

Chinese FinTech are ubiquitous and especially innovative. For example, firms such as ChinaPnR rely on biometrics as a security measure. However, despite its obvious success and saturation of the market, the Chinese FinTech industry is not without its challenges. First, there is a shortage of skilled employees for the booming firms. Second, FinTechs are facing increased regulations, particularly in the digital loan sector.

Simon Lance, managing director in China for a global recruitment agency, has explained that the areas most affected by a shortage of skilled workers are internet, Big Data, augmented reality and virtual reality. However, Mr Lance added that the skills shortage is not unique to China but is a global phenomenon, with Chinese employers left competing for rare talent.

Although New York, London and Silicon Valley promote themselves as the world’s leading FinTech hubs, China has surpassed these cities and established itself as a leader of FinTech innovation and adoption, at an unparalleled speed in other more traditional markets.

Bruno Lanvin, executive director of INSEAD Global Indices in Singapore, said the major challenge for China and India lies in their ability to attract and retain talent. “They both face the issue of local higher-skilled workers leaving to live and work abroad,” he said. “To improve their attractiveness, they have to further boost their regulatory and market landscapes. However, delving deeper and looking at the city level, the two countries have metropolises exemplary in terms of their talent attractiveness.”

The 2017 Hays Asia Salary Guide noted that some 70 percent of employers in China said they did not have the right talent to “achieve current business objectives”. China’s struggle to properly staff its FinTech firms is a significant restraint on the rapidly growing industry, and may necessitate additional investment in training new workers.

The second challenge, increased regulation, has evolved in response to issues of fraud or poor business practices among certain firms. The China Banking Regulatory Commission published the Guidelines on Depositing and Managing Online Lending Capital in February 2017. The regulatory group now requires user funds be deposited into commercial banks, transactions must be approved by both borrower and lender and clear records of transactions must be recorded. Similar to other countries, Chinese regulators have had to act quickly and do their best to shape rules that will help to curb the risky behaviour of FinTech industry firms.

Jessica Lewis is an associate at Bennett Jones LLP. She can be contacted on +1 (604) 891 5160 or by email: lewisj@bennettjones.com.